CAC40 AND SCHNEIDER STOCK

You can ask I lost my mind post about a releatively unknown stock from France. Sorry for that fellows but I was just asked about this stock and created this analysis and I tought it could worth sharing with you, because it is a good template how works the divergence trading beetwen one certain index and its stock.

In a historical view at the big mortgage crisis in 2007 the Schneider was around 26€/share and plunged massively and bottomed at around 13€ and has started to gain hand in hand together with CAC40 and other benchmark indices till today. In 2011 March made a local top at 28€ and then fall back until end of 2011 and then started the great rally and uptrend which has been with us for around 2,5 years.

The markets always run in cycles meaning optimism and pessimism. It is true for Schneider as well. The trees never grow up to the sky. So all rally needs to be followed by some kinds of consolidation. The consolidation only means 10% per year or 20-30% per in each 4-5 years. But, it will recover after a while because we are in the middle of secular bullish uptrend of the European markets. After two an a half year rally of Schneider’s stocks needs to come some corrections. Why? I have some arguments here below:

1. The market - specially CAC40 – is in strong bullish uptrend , no doubt. But on each market there are faster and lazy stocks. Laggings and leaders. Schneider has been leader till end of 2013 is vasty overvalued by now comparing to the CAC40. There is a great arbitrage gap between the index and CAC40 recently. 
2. The old rule says the leaders will be losers and lazy stocks will be leaders because it is vital behavior the markets. The investors love to buy the optimism, the tops and the rallies and nobody wants to own the lazy and underperforming stocks. Statistically proven that this is the typical loser attitude and one of the worst investment bias. We tend to buy the lazy and sell the trendy and fancy stocks and vice-versa.
3. Currently after the long rally the Schneider is a fancy stock and needs to close the gap between the CAC40 gap. Why? Cause they have to correlate with each other and can one run faster for a while but not forever. And, sooner or later they need to close the gap and catch up each other. It is the only question of time.

In 2 years chart easier to recognize the correlation between them, so now the Schenider is overvalued and overbought and CAC40 is undervalued and undersold.

• There is a huge gap – which means the following scenario for 2014. The CAC40 will gain faster than Schenider this year. It doesn’t mean the Schenider will fall down massively, only means this year will Schneider is going to underperform the CAC40 – around 0-10% range is the most realistic
• The consolidation is started in 2014 which means recently the Schneider underperforming the CAC40 on YTD so far:
• Schneider: 2014 YTD +6.56%
• CAC40: 2014 YTD + 12.46%

• In the bigger perspective the bullish trend of CAC40 is still not violated and we are expecting more gain this year over 20%
• For Schneider the bullish monemtum can countinue further, but with lower performamce in range of 0-10% only, which is not a disaster but we shouldn’t expect that kind ofrally like last year with +16,66%. 

All in all. Our suggestion is to buy all correction periods during this year. Grab all opportunities which exceeds the 4-5% correction level and buy these dip options and hold tightly.

The BFM Assets Team.